Great new oil rush to Russia

RUSSIA'S Sakhalin Island is a grim former Soviet penal colony which, even in czarist times, Chekhov described as a living hell, the most depressing place he had ever seen. But to Anglo-Dutch oil giant Shell, the lonely island in the Okhotsk Sea, north of Japan, is pure heaven. The oil industry in this country was once viewed as being as risky as Russian roulette - it is now seen as a sound investment.

BP recently revealed it is eyeing a deal with Yukos, an increasingly respected Russian oil titan, about developing a huge new field in eastern Siberia. 'We are holding preliminary talks with Yukos and are looking at whether there is a way to work together,' said BP's Moscow external affairs director Peter Henshaw.

The company last month boosted its stake in Russian oil producer Sidanko, and it is interested in exploring off Sakhalin. It also holds a major stake in the Russia Petroleum consortium, which is to build a gas pipeline to China from eastern Siberia. 'It's all part of our increased appetite for some more business here,' added Henshaw.

Less than 20 months ago, BP was threatening to pull out of the Russian oil business after losing control of a major asset in a bankruptcy action that was widely denounced as a sham. The new air of confidence stems from President Vladimir Putin's bid to stop major foreign companies being ripped off in the way that BP was. It also stems from the arrival of stability and sustainable growth after years of post-Soviet chaos.

Another key factor is the desire of the oil majors to have a larger slice of the action in non-Opec Russia, the world's second-largest oil exporter, so protecting themselves against volatile supplies from nations in the petroleum exporters' cartel. But the new climate does not mean an end to the hard-ships involved in developing the former Soviet oil industry and revamping production facilities. Far from it. On Sakhalin, for example, Shell started pumping from the Piltun-Astokhskoye oilfield in 1999. But only when an undersea pipe is completed in four years will it prevent output being disrupted by the extreme weather conditions in this remote outpost.

Just after the production season started last month, work had to stop when an ice floe struck the operation. 'We are losing quite a lot of revenue. It is not good for our cashflow,' said Jurgen Janzen, who is responsible for the oilfield. The area is also prone to earthquakes. Expatriate oil managers live alongside Russian workers in spartan conditions amid 1970s decor on the Molikpaq drilling platform. 'It is not state of the art here. It's austere. But eventually we will replace the living quarters,' Janzen said.

Jeffrey Valkar, head of a US business centre on the island, forecast: 'This could be an extraordinarily important producer for world markets, not just for neighbouring Asian countries.'

Thousands of miles away, far greater potential hazards afflict the Caspian Sea, which should be experiencing a record breaking oil boom. Russia is stepping up its naval patrols amid bitter feuding between five nations over the carve-up of the world's third largest oil and gas reserves. Iran has already sent out gunboats in a row with Azerbaijan, disrupting BP's work in the Alov-Sharg-Araz field. The result is a loss of confidence in the Caspian, said Julian Lee, senior analyst with the London-based Centre for Global Energy Studies. 'If you are sitting in Houston or London and you hear about gunboats, you assume the whole region is unstable so your corporate management view might be more negative than it should be,' he said.

Officially, the oil companies remain optimistic about a political settlement allowing the oil to flow properly from the Caspian. Yet the dispute highlights the fact that much of the former Soviet Union is much less stable than it likes to boast.